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    Income Effect

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    Spandan Thakkar
    The income effect describes how a change in the price of a good can impact consumer demand for that good and related goods based on how the price change affects their real income. When the price of a good decreases, consumers have more disposable income which leads to an increase in the quantity demanded of that good through both the substitution effect and income effect. The income effect is demonstrated by the additional increase in quantity demanded beyond what is caused by the substitution effect alone.

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    Income Effect

    Uploaded by

    Spandan Thakkar
    64 views3 pages
    The income effect describes how a change in the price of a good can impact consumer demand for that good and related goods based on how the price change affects their real income. When the price of a good decreases, consumers have more disposable income which leads to an increase in the quantity demanded of that good through both the substitution effect and income effect. The income effect is demonstrated by the additional increase in quantity demanded beyond what is caused by the substitution effect alone.

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    income effect its useless dont open

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    INCOME EFFECT

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    The income effect describes how a change in the price of a good can impact consumer demand for that good and related goods based on how the price change affects their real income. When the price of a good decreases, consumers have more disposable income which leads to an increase in the quantity demanded of that good through both the substitution effect and income effect. The income effect is demonstrated by the additional increase in quantity demanded beyond what is caused by the substitution effect alone.

    Copyright:

    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
    64 views3 pages

    Income Effect

    Uploaded by

    Spandan Thakkar
    The income effect describes how a change in the price of a good can impact consumer demand for that good and related goods based on how the price change affects their real income. When the price of a good decreases, consumers have more disposable income which leads to an increase in the quantity demanded of that good through both the substitution effect and income effect. The income effect is demonstrated by the additional increase in quantity demanded beyond what is caused by the substitution effect alone.

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    © All Rights Reserved
    Download as PPTX, PDF, TXT or read online from Scribd
    Download as pptx, pdf, or txt
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     INCOME EFFECT

    • In microeconomics, the income effect is the change in demand for a good or service caused by a
    change in a consumer's purchasing power resulting from a change in real income. This change can
    be the result of a rise in wages etc or because existing income is freed up by a decrease or increase
    in the price of a good that money is being spent on.

    • The income effect describes how the change in the price of a good can change the quantity that
    consumers will demand of that good and related goods, based on how the price change affects
    their real income. The change in the quantity demanded resulting from a change in price of a good
    can vary depending on the interaction of the income and substitution effects. For inferior goods,
    the income effect dominates the substitution effect and leads consumers to purchase more of a
    good, and less of substitute goods, when the price rises.

    • Income effect refers to the change in the demand for a good as a result of a change in the income
    of a consumer. It is important to note that we are only concerned with relative income, i.e., income
    in terms of market prices.
    • The income effect is the change in the consumption of goods based on income. This means
    consumers will generally spend more if they experience an increase in income, and they may
    spend less if their income drops. But the effect doesn't dictate what kind of goods consumers will
    buy. They may opt to purchase more expensive goods in lesser quantities or cheaper goods in
    higher quantities, depending on their circumstances and preferences.

    • The income effect can be both direct or indirect. When


    a consumer chooses to make changes to the way they
    spend because of a change in income, the income effect
    is said to be direct. For example, a consumer may choose
    to spend less on clothing because their income has
    dropped.
    • In this graph, we demonstrate what happens when the price of Good X decreases. What happens is that the consumer’s
    disposable income increases. This shifts the DC line from DC1 (the grey line), to DC2 (the blue line). This demonstrates
    that the consumer has more disposable income and can therefore demand more of Good X.

    • At point B, we see both the combined effect of the lower price


    which attracts customers through the substitution effect, but
    also the increase in disposable income, which attracts
    customers through the income effect. The shift from Point A,
    to Point B, shows the total effect of a decrease in price – including
    both the substitution effect, as well as the income effect.

    • As we can see from the graph above – the initial starting point is at Point A where disposable income is on the
    grey line (DC1). At this point, the demand for Good Y is Y1 and Good X in Q1. When the price of Good X
    decreases, it has a substitute effect. In other words, customers who used to buy Good Y will buy more of
    Good X as a result. This is demonstrated at point C. So the difference between Q1 and Q3 is known as the
    substitute effect.

    • The income effect is the boost in the quantity that is achieved as a result of consumers having a greater
    quantity of disposable income – which is demonstrated by the difference between point C and point B.

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